Solar Stocks: Debating China’s Subsidy Program

By

Eric Savitz

Updated March 27, 2009 3:35 a.m. ET

Order Reprints

Print Article

Text size

So, care to guess the direction of solar stocks in Friday's session? The stocks had a huge run on Thursday after China unveiled a program to subdize certain solar installations by 20 RMB/watt, or just under $3 a watt. The China-based solar stocks in particular had aammoth rally, with a few stocks up more than 40%. While the program is clearly intriguing, and has the potential to accelerate solar adoption in China, there are so far few details available on just how big the program will be, and whether there will be a cap on how much the country is willing to spend. There also seems to be some debate about what type of installations will be eligible for the subsidy; what is clear is that it is targeted at commercial installations of at least 50 KW, but not residential or utility projects.

The Street's reaction to the news is decidedly mixed. While the broad outlines are promising, the lack of details leaves some observers cautious. And the huge move on Thursday makes some think the stocks have over-reacted. Here's a quick rundown on some of the early commentary on the situation:

Deutsche Bank's Steve O'Rourke asserts that the stocks have over-reacted to the news, and says his near-term outlook for the industry remains "negatively biased as credit issues drive prices down and inventories up." He adds that on the China subsidy, "the devil is in the details, and we await them." Citigroup's Timothy Arcuri reports that the program is targeted specifically at commercial and building-integrated applications. He thinks the subsidy program could generate 100-200MW of incremental activity, hardly making a dent in what he estimates is 4 GW of excess global channel inventories. Arcuri added SunPower (SPWRA), which he already rates a Sell, to Citi's Top Picks Live list. Basically, he's calling the stock a table-pounding short, and writes that he is "increasingly coninced there is near-term risk given what is likely a reset to full-year guide whet it reports," a GAAP loss in Q2, more evidence of rapid ASP compression, market share loss and "potentially more news on balance sheet de-leveraging." Oppenheimer's Sam Dubinsky is cutting his rating on Suntech (STP) to Underperform from Perform after the stock soared 44% on Thursday. "Wesimply don't see the earnings power to justify an $11 stock price and believehigh debt levels will be an ongoing overhang," he writes. Dubinsky adds that the subsidy program is "very favorable and could support a price cushion for the sector," but that the run-up is premature given the lack of detail. Hapoalim Securities analyst Gordon Johnson asserts that the program is only for BIPV - building integrated photovoltaic - installations, and doesn't apply to roof-top or ground-based systems; that is a different interpretation of the program than that being used by other analysts. He says that Suntech is the only China-based player with a BIPV solution. His view is the program will create only 40-50MW of additional demand. Johnson, who has been vocally negative on the sector, thinks the stocks over-reacted, and proposes investors consider shorting the stocks once the dust settles. Bank of America/Merrill Lynch analyst Lu Yeung, who has remains positive on the China solar stocks, sees the initial impact of the subsidy program as "moderate," in the hundreds of MW range, given it is limited to commercial and BIPV installations, and does not cover residential or utility projects. Piper Jaffray analyst Jesse Pichel says it is unlikely the program will have no cap; he writes that the program is "certainly a long-term positive," but that "it is premature to bid up solar stocks significantly on this news alone." In particular, he notes that Q1 and Q2 results are likely to be weak. Thomas Weisel Partners analyst Jeff Osborne says that while he concerned about Q1 and Q2, as well, and about the fact that every single player intends to take share in a shrinking market, the China subsidy news is "a long term positive." He adds that the subsidy is almost at the same level as solar module pricing, which makes the program "one of the most attractive, if not the most attractive in the world." But he cautions that "it will take time to build out the program," and that it could unfold like the subsidy program in Greece, in which 3.7 GW of applications were filed "and the government came in and put the brakes on the program."

Those were some fat gains on Thursday; a round of profit taking Friday would hardly be shocking.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.